Insider Secrets Podcast Season 2, Episode 1
Guest: Neal Bawa
Subscribe to Multi-Family Insider Secrets on your favorite podcast app:
Neal Bawa is CEO / Founder at UGro and Grocapitus, two commercial real estate investment companies. Neal’s companies use cutting edge real estate analytics technology to source and acquire OR build large Commercial properties across the U.S., for over 800 investors. Current portfolio over 4800 units, with an AUM value (upon completion) of over $1 Billion.
Neal shares his team’s unique and cutting-edge real estate data methodologies to connect with geeky and nerdy (or just data driven) investors who share his vision – That Data beats gut feel by a million miles. Over 10,000 real estate investors have taken his free Real Estate Data Analytics course on udemy.com and the course has over 1000 five-star reviews.
Neal speaks at dozens of real estate conferences across the country and virtually, on the Internet. Over 5,000 investors attend his multifamily webinar series each year and hundreds have attended his Magic of Multifamily boot camps. His Facebook and meetup groups have tens of thousands of investors.
Neal believes that we are at a turning point, where traditional commercial real estate will combine with Proptech and Fintech technology disruptors, and will truly reach its potential as a tradable, highly liquid asset class that will rival and eventually beat the stock market in its size and scope. He also believes that the Build-to-rent will become a much larger and more profitable part of the Multifamily asset class over the next 5 years, due to its uniquely desirable characteristics. Neal’s vision is to combine the Build-to-rent asset class with fractionalization to democratize commercial real estate.
80% of all profit being generated in real estate in the last 10 years is simply tied to things that have nothing to do with properties and even nothing to do with markets.
The best days of multifamily are behind us. I don’t have any data that suggests that the best days of multi-family are ahead of us.
By speaking relatively, I think multifamily’s still up there, but it’s best days are unquestionably behind it.
I believe that going forward, multi-family is likely to track with inflation.
Inflation is simply a tax on savers. Inflation is a deliberately designed mechanism designed by the banking system to dilute the value of your dollars.
The reserve currency of the world is not a privilege. It is a burden. And if you don’t understand why it’s a burden, then you need to do some research and understand that it is a burden.
Technology tends to basically have an impact where it drives down rates and we are entering an extraordinary new phase of technology, which will make the last 30 years look like child’s clay.
“I love to listen to data points because I think data points are what help us become a better syndicator, a better owner operator” – Mike
“I’m interested in knowing how things work. I’m interested in knowing how people think, how they behave, how they behave rationally, and mostly how they behave irrationally” – Neal
“Macroeconomics is driving all profit or lack thereof in real estate. It’s not us, we’re players in the game and we make tactical moves that lead to more profit or less profit” – Neal
“In my mind, there are no geniuses in the syndication industry, there’s a bunch of people that believe that they’re geniuses, that they’re special, that they’re unique. What they don’t realize is there was timing. Timing was almost all of it” – Neal
“So the kind of cash flow that we’ve all come to know, love and enjoy, and the kind of cap rates that we’ve come to know, love and enjoy, are not coming back” – Neal
“The enormity of what generative AI is capable of is not visible yet, but we will see that technology in the next 15 years is going to drive our rates down even further” – Neal
“There’s two kinds of debt. There’s fixed debt and there’s floating debt or adjusting debt. No syndicator really ever wants to do fixed debt. There are scenarios where there’s an exception, but most of the time, fixed debt locks you in” – Neal
[00:39] Intro to Podcast
[02:05] Intro to episode guest
[02:57] One word that describes Neal personally and professionally.
[04:20] Neal shares about his background and what he is up to.
[06:21] Neal talks about the ghost of macroeconomics.
[10:14] So explain a little bit or what’s your perspective right now of where we are, where we’ve come from and where we’re going?
[17:57] Explain what inflation is and where it’s at today?
[25:31] What do you do to do multi-family and operate in the disparity of everything that’s going on?
[34:28] How to get ahold of Neal and what he can do for you.
[36:23] What ‘s the best tourist attraction you’ve ever seen?
[37:01] Best restaurant?
[37:30] Last nuggets from Neal
Google: Neal Bawa (He is the only one)
[00:00:00] Kristen: Welcome to this edition of Insider Secrets, the weekly podcast that turns real estate investing goals into reality. Each show we interview guests who are seasoned real estate professionals, actively closing and managing real estate deals. Mike is the founder of My Core Intentions and would like to help you make your real estate investing dreams a reality.
Mike coaches you to buy investment real estate, creating short-term cash flow and long-term wealth. Your host and real estate coach, Mike Morawski, has more than 30 years of real estate investing and property management experience. Here’s your host, Mike .
[00:00:39] Mike: Hey everybody. Welcome back. I am glad that you’re here today. Hey, if you’re here for the first time, sit back, buckle up. You’re in for a treat this morning. I’ve had a number of guests over the last few weeks that have just really brought some great information, some great perspective about mindset and data and [00:01:00] markets to the platform.
So I’m glad you’re here. If you’re here for the first time, like us, love us, follow us on social media, and if you’re on YouTube listening in Live this morning, Smash that subscribe button so that you’re notified when we do go live and we bring new content out all the time, daily to you to learn, to educate, to grow.
And I want to talk again this morning about being intentional, about being intentional about our direction and what we’re trying to do, whether it’s in your daily disciplines in the morning, whether it’s your prayer time, your meditation time, your exercise time, or whether it’s focused in your business strategy, the market you’re looking at, the type of product that you’re buying putting together a syndication, what are you intentional about?
What do you need to work on? Hey, it’s the weekend. Maybe on the weekend you’re intentional about spending time with your family and just doing what is important there. [00:02:00] So I’m glad that you’re here. I hope that today we bring some insights, some knowledge for you. My guest today, I’m super excited about Neal Bawa with Grocapitus and Multi-Family University. All things about real estate. And Neal’s gonna join us. We’re gonna talk about markets, we’re gonna talk about investment strategies. Let me bring Neal in real quick. Hey, Neal good morning.
[00:02:23] Neal: Good morning. Good morning. Thanks for having me on.
[00:02:25] Mike: Hey, thanks for being here. I appreciate it. I’ve been a longtime fan, followed you around, listened to a lot of your, I’m not an economist. But I love to listen to data points, right? Because I think data points are what help us become a better syndicator, a better owner operator. We pay more attention to the market by the data points. So I know we’re gonna get into that a little bit, but the first question I always ask my guests is, in one word, what best describes you personally and professionally?
[00:02:58] Neal: Never changed. The word is [00:03:00] curious. I’m a curious character.
[00:03:02] Mike: Wow. Awesome. You know, I’m in the process of writing a book from all the podcasts I’ve done, and I ask that question all the time and I don’t believe that anybody’s ever said curious. I like that. What makes you curious?
[00:03:15] Neal: I’m interested in knowing how things work. I’m interested in knowing how people think, how they behave, how they behave rationally, and mostly how they behave irrationally. What their intentions are and what they actually achieve, which usually is counterproductive to their intentions. And I try to apply that curiosity to all things. And I try to use numbers to gauge, to gauge what people are capable of and what they actually achieve. I try to break it down into numbers everything. If you saw the matrix, right? That’s the way I see the world. There’s a bunch of numbers. I’m reading them and they’re telling me things.
[00:03:51] Mike: Interesting. I think that I’m curious too. I’m always curious about how things work: how numbers work, how the financial side of [00:04:00] underwriting and then the due diligence, how does somebody operate a property, or how can I operate a property better? I think it’s a curiosity that helps us all grow.
“That’s a great word. I love that.” So Neal, could you tell us a little bit of background about yourself?
[00:04:15] Neal: Sure.
[00:04:15] Mike: You know where you came from and how you got to where you’re at, doing what you’re doing now?
[00:04:20] Neal: Sure. I’m a nerd, a geek, a technologist – data scientist by profession, computer science graduate. Ran a technology company for 15 years, sold it for a terrific price – a class leading price. Got into real estate simply because I live in Taxofornia, and I was paying 50 plus percent taxes every year. Did real estate for about six years on my own – no investors, just me – for tax benefits and for cash flow benefits.
And during that time, invented a system called Location Magic, which is a data-driven or data science-driven system that figures out the best cities in America to invest in.
[00:04:57] Mike: Interesting. What does it mean [00:05:00] to be a data scientist?
[00:05:01] Neal: I think fundamentally the title applies to anyone that when making decisions figures out a) what data helps me make a better decision, then brings that data together, makes that effort. And then is continuously looking at the decisions that they’ve made by bringing in more data to see if that decision was right or if it should be changed or completely thrown away. And you start from scratch. If you do those things, you are an amateur data scientist.
[00:05:33] Mike: So here’s what you just said that really sparked a chord for me. When I underwrite and I always look at it like there’s three ghosts, right? We have if you ever watch the Christmas Carol, you’ve got the ghost of the past, the present, and the future.
And we have to look at that when we’re underwriting, when we’re taking all this data, financial information that a seller provides, we put it in our underwriting tool. Then we see how we can perform, [00:06:00] and then we have to take a look at those metrics. What levers can we pull to see if under pressure, we can stress that deal?
So it still performs. If rents don’t go up or occupancy drops or we have to hold it longer or shorter, how does that all perform? And I think that there’s a lot of data built into that.
[00:06:22] Neal: There is, but I think that the industry in general does a good job with the ghost of past, present, and future. I think that there’s just not enough discussion on the ghost above all three of these ghosts. And that ghost is macroeconomics. So starting 2008, it is my core belief, and this is what my data says. Macroeconomics is driving all profit or lack thereof in real estate. It’s not us. We’re players in the game and we make tactical moves that lead to more profit or less profit.
But the big numbers, the big dollars, the big zeros, [00:07:00] they’re all coming from macroeconomics. Someone outside the ghost above is playing a big game, and we’re all characters in that game without realizing that we are. So my fundamental belief is macroeconomics is much more important in business today. Any kind of business, but especially in real estate, especially in fixed assets than people give it credit for.
And I believe, and I’m running some experiments on this using my own money, that it’s possible that macroeconomics is more than 80% of all success, all dollars of profit in real estate at this point. 80.
[00:07:41] Mike: So, say that again. 80% is what?
[00:07:45] Neal: 80% of all profit being generated in real estate in the last 10 years is simply tied to things that have nothing to do with properties and even nothing to do with markets. It has everything to do with macroeconomics. The understanding of what’s happening in the larger [00:08:00] economy, both inside and outside the US is actually driving most of our profits. In the future years, it’s gonna drive our lack of profits.
[00:08:07] Mike: So how do you mitigate in that environment? Right, because there’s a lot of people that are owner operators that think they’re brilliant and because they’ve raised rents higher than their expectations because they’ve shortsighted cap rates because they got a certain debt rate in place. What you’re saying is completely the opposite of that, right?
[00:08:30] Neal: Yes.
[00:08:30] Mike: So you’re saying it’s not the operator, that it’s the economic condition of our world.
[00:08:35] Neal: That’s what data shows me. What I’m finding is in any market, any sphere of activity, let’s say outside of real estate, let’s just pick something. Let’s pick something like, you know, the tractor industry, the industry that’s building tractors. If you look at these industries and you look at them, what often happens is a small percentage of the syndicators in that industry. It’s not syndicators, [00:09:00] whatever the equivalent is, are making most of the money, and are having most of the success.
And then you have a large percentage of people that are simply unsuccessful in doing anything there. In industries that are driven by macroeconomics, you see outstandingly large numbers of examples of success or failure. In our case, in the last eight or nine years, it has been success, and it’s my premise that it will be our failure in the future because there’s something happening above us that’s actually responsible.
So everyone looks like a genius. So in my mind, there are no geniuses in the syndication industry, there’s a bunch of people that believe that they’re geniuses, that they’re special, that they’re unique. What they don’t realize is there was timing. Timing was almost all of it.
[00:09:43] Mike: So should I play the game or just sit out?
[00:09:47] Neal: I think that you have to understand where you are in the game and then you make a decision on whether to play or sit out, right? So we can delve deep into that because I think that’s a very fascinating question, Mike. And that is the key question to ask, right? So where am I in the [00:10:00] game? And does it make sense for me to play or does it make sense for me to get out?
I think that is the key question. If you believe that there’s something, the ghost above macroeconomics, that’s directing everything, you’ve gotta basically ask yourself that question.
[00:10:14] Mike: So explain a little bit or what’s your perspective right now of where we are, where we’ve come from and where we’re going?
[00:10:24] Neal: Sure. So the best days of multifamily are behind us. So I don’t have any data that suggests that the best days of multi-family are ahead of us. So I believe that for the last 10 years, multi-family was a truly exceptional asset class. It was head and shoulders above any other asset class that I have seen in the last 10 years with the possible exception of crypto, which is so bizarre that it’s really hard to predict what’s happening.
So among predictable asset classes, multifamily was far and away the greatest in the United States in any realm of activity, not [00:11:00] just real estate. Today, multi-family is just another asset class. It is what it is. Its best days are behind it. And the only reason it’s probably still in my top 10% list of things to do, or asset classes is simply because every other asset class has done even worse. So by speaking relatively, I think multifamily’s still up there, but it’s best days are unquestionably behind it.
[00:11:26] Mike: So you said, according to your data that you don’t see it a good asset class over the future or coming back to where it was over the last decade?
[00:11:35] Neal: I think the second part. I do not see it ever coming back to where it was. The window of time in the last 10 years for multi-family was a one-time thing. And whoever benefited, benefited. Is it not a good asset class? No, I wouldn’t say that. I would say depending upon the window of time over the next three years, it might be a not good asset class, an okay asset class or a decent asset class, but it’s really never going to be great.
[00:11:57] Mike: So, but it’ll still provide cash flow. [00:12:00] You can still go in and buy value add and put capital improvements and operational improvements in place and create more value by doing those things in multi-family.
[00:12:12] Neal: To a certain extent, the answer is that while everything that you said is correct, the ability of those things to drive up rents has decreased remarkably from five years ago. And the big piece that’s pushing all of those down is affordability. So, when the United States, when the average tenant was at 19% affordability, you had a lot more room to raise rents by doing X. When it was 24%, maybe your ability was 0.75 x. Today your ability to raise rents is 0.5 x because in most markets in the US that we like – great markets in the US that we’ve all been talking about for the last six or seven years, the average tenant is in the thirties, in terms of affordability. More than 30% of gross income is [00:13:00] going into rent. Some markets have already touched 40. Data suggests that when you start touching the mid thirties and the forties, there is an extremely inflexible reaction to rent increases. People simply, they won’t care if you gold plate their chairs. They won’t care if the granite countertop becomes quartz, they will pay the same rent.
It doesn’t go up at all. It doesn’t go up $1. It just stays at the same level regardless of the product and its quality. And many, many, many, many markets in the US, not all of it. The US, luckily are hitting that level and we are seeing that impact right now. Rents are flat everywhere in the United States, even though inflation is at six and a half percent.
[00:13:39] Mike: So I find that a little bit interesting cause we won’t see rent growth at 20% where we saw it in some markets or even higher. But will we still see that two to 3% rent growth basis that you normally see in an average [00:14:00] market? Because we really have bounced back to average markets, right?
[00:14:03] Neal: Well, currently we’re not an average market, I think currently is a horrible market, but I think that we certainly have the possibility. So I’ll agree with you. I’ll say, Mike, yes, you’re right. We have the possibility of fairly quickly getting back to that average market, the pre 2019 marketplace. But here’s the part that I don’t agree on. So, multi-family isn’t an outstanding asset class because it tracks with inflation. What happened over the last 10 years is multi-family tracked much higher than inflation. Inflation was actually pretty darn low in the US except for the last 15 months.
It’s been very low. The Fed wants inflation to be at 2%, and the average inflation over the last 10 years has been 1.4%. 1.4% is pretty outstanding. And during that time, rent growth in the US was close to 6%, right? So there were, you know, obviously there was a 15% year, which was 2021, and then there were many years that were six or seven or eight.
So the average comes out to about 6%. So this magic of multi-family that we’re all used to was [00:15:00] multi-family producing 6% rent growth in a inflation environment that’s under one and a half percent. Essentially multifamily was three or four times inflation. So today, I believe that going forward, multi-family is likely to track with inflation.
What that means is if you have 4% inflation, you get 4% multi-family. If you have 6% inflation, you get 6% multi-family. And in that environment we will struggle to generate cash flow unless, and there’s one very important, unless interest rates come back down, well, well, well below 4%. In an environment where interest rates are in the fives or in the sixes, if multifamily simply tracks inflation, cash flow is poor. I can spend 15 minutes on an Excel spreadsheet and demonstrate that. So the kind of cash flow that we’ve all come to know, love and enjoy, and the kind of cap rates that we’ve come to know, love and enjoy, are not coming back. Now the news is actually better on the cap rate side.
[00:15:57] Mike: Yeah.
[00:15:58] Neal: For the simple reason that there [00:16:00] aren’t a lot of other asset classes that people can put money into. So I have complete belief by the way that when interest rates normalize, right? So normalize and we can define what normal means. You would see a cap rate reversion. We’ve seen a rapid increase in cap rates in the last five or six.
And in certain kinds of assets, especially classy assets have bounced up a lot. They’re going for 5.3 cap where just 15 months ago, they were going for 4 caps. So, you know, there’s been a significant adjustment there. And even class A assets, maybe 0.75 caps so far. So that rapid, very rapid change in cap rate that we’ve seen is likely to compress again when we get to a more normalized interest rate environment.
So on the cap rate side, I feel more bullish. But on the rent side, I can tell you this. It’s highly, highly unlikely. Once you get above 35% affordability, it’s extremely unlikely that rents are going to be in excess of inflation. And if rents are just tracking inflation, keep in mind, your salaries are increasing, your expenses are increasing. It’s not as sexy a situation as we’ve lived with for the [00:17:00] last decade.
[00:17:47] Mike: Okay? So let’s back up just a little bit and bring this down to a level that some of my listeners can understand. Okay. So first thing I’d like you to do is explain what inflation is [00:18:00] and where it’s at today?
[00:18:02] Neal: Inflation is simply a tax on savers. Inflation is a deliberately designed mechanism designed by the banking system to dilute the value of your dollars. So it’s designed to be at 2% so the government can inflate its debt away. So the government can basically keep adding on more debt as long as inflation reduces the value of the dollar. The reason it doesn’t blow up worldwide is every other country is doing the same thing and generally doing a worse job of it than the US is.
So inflation reduces the value of dollars. It’s a tax on savers and it is a benefit for anyone that is taking on debt because taking on debt in an inflationary environment is generally a good thing. And like we can talk about why taking on debt even in a high inflation environment is a good thing.
[00:18:50] Mike: Great. Now, what is inflation at today?
[00:18:54] Neal: So over the last 12 months, you know, inflation is going to be somewhere around [00:19:00] six and a half percent. Over the last three months, it’s going to be somewhere around 3%. So, you know, you gotta look at whether you wanna look at the three month number, the 12 month number.
I pretty much discount the last 12 months simply because you look in the past last 12 months, if that time has been normalized. The last 12 months have been anything but normal. We have a war that started in the last 12 months and it’s impacting everything. So the 12 month reading is not something I wanna look at, but the three month reading is something that I care more about. So somewhere between three and 4 percent.
[00:19:29] Mike: Okay, great. So you know, I remember years ago I had a retail store in the northwest suburbs of Chicago and we sold hot tubs and swimming pools. And guy down the street was a printer and you’d go in and he had a big button on his shirt that he wore, it said normal or it said, what is normal upside down on the button.
I want to come to you and I want to ask you right now, what does normalizing mean and what does that look like?
[00:19:56] Neal: Sure. So the Federal Reserve, it currently has [00:20:00] its internal rate called the Fed Funds rate at 4.75%. So it went up last month to 4.75% normal. And the Fed’s definition is most important. We are all servants of the Fed when it comes to real estate. The Fed’s definition of normal currently is a Fed funds rate that is between two and 2.25%. So that is what they call baseline. Now, what does that baseline really mean? It simply means this, a rate at which the Fed neither helps nor hurts the economy.
It is the equilibrium rate at which the Fed is not speeding up the economy, but it’s not slowing it down either. The economy is functioning normally. And so that’s that fed rate. So two to 2.25. And the Fed wants to get back to that point where it’s not hurting or helping the economy and it almost never gets to that point. Just so you know.
It’s either below it because it needs to help the economy or it’s above it because it needs to slow it. So currently the Fed is two and a half points above it. Two and a half doesn’t sound [00:21:00] like a lot, but it is an enormous weight on the economy so that, you know, just a one point increase is the weight on the economy.
Two and a half percent is a massive, you know elephant sitting on top of the economy forcing it down. So our goal, the Fed’s goal is to normalize the economy and get back to that rate. I estimate it’ll take them almost two years to get back to that rate or a little more than two years to get back to that rate, and they may never get back to it if inflation is sticky.
[00:21:26] Mike: Sticky. Interesting. I remember when I first went into real estate and I’ve been in real estate about 30 years. But it was, you know, low double digits when I went into real estate, the interest rate, and then they carefully came down. They were eight, six, 5%. And I remember everybody used to say, oh, when my parents bought a house, they bought a house at 3%.
And then, again here, our interest rates got all the way down to that. You could have got a 30 year fixed at 2.75 and now they’re going back up again and everybody is freaking out. Should [00:22:00] people be freaking out?
[00:22:02] Neal: Not really. I see no evidence of a freak out. So first, the United States is easily the strongest economy in the world at this point. Our position as the reserve currency of the world has never been more secure. In my mind. I know there’s a lot of conspiracy theories around petro dollars and things like that. I find that if you’re a straight up economist, you sort of laugh at these points of things because there are no potential other alternatives to the dollar at this point.
With the Chinese yuan being the absolute worst alternative amongst any alternatives that may even be considered, the eurozone’s clearly shown that they don’t wanna be the reserve currency of the world. They don’t want that weight. The reserve currency of the world is not a privilege. It is a burden. And if you don’t understand why it’s a burden, then you need to do some research and understand that it is a burden. The global financial system requires a reserve currency and the holder of the reserve currency must run large [00:23:00] deficits continuously and produce more currencies so other people can hold it.
So I don’t see us defaulting on our debt. I don’t see us coming into a situation where people don’t wanna buy our debt. Which means that over time the trend is for interest rates to go lower. If you look at a 30 year chart, you’ll notice that rates drop lower over time. There’s two reasons for that.
One is technology. Technology tends to basically have an impact where it drives down rates and we are entering an extraordinary new phase of technology, which will make the last 30 years look like child’s clay. And November 29, 2022 was the first day of that extraordinary new era when a software called ChatGPT launched.
So the enormity of what generative AI is capable of is not visible yet, but we will see that technology in the next 15 years is going to drive our rates down even further. The other thing that’s driving our rates down is population growth. It’s slowing everywhere in the world, and if you just wanna see what [00:24:00] happens to an economy and its interest rates, when its population growth slows or turned negative.
Just study Japan, 30 years, everyone’s been saying they’re printing way more money than we are as a percentage of their GDP. And they have trouble getting inflation to 2%. Even right now, the Japanese are the lowest inflation economy in the developed world. So they have trouble getting their inflation up, not down.
So the natural state of things based on macroeconomics is for interest rates to go back down. The catch is inflation tends to be sticky because once somebody raises prices, unless there’s severe distress in the marketplace or their severe competition, you are not likely to take those down simply because your suppliers have started bringing stuff in cheaper.
So there is a tendency for the new rates that go up to stay, even though they should come down, and that takes a while to fix. It’s very rare for inflation to just disappear [00:25:00] from 9% to 6% to 3% very quickly. So it takes a lot of time. I expect that those normalized rates will come back two years from now, not one year from now. Though, multi-family by the way, multi-family mortgage rates should fall in August or September. We can talk about why, but I expect that generally the Fed’s interest rates, which drive the economy will take two years to correct.
[00:25:24] Mike: So with all this said, how do you become a player in the multi-family space today? What do you do to do multi-family and operate in the disparity of everything that’s going on?
[00:25:41] Neal: You’re actually in a good position. So let’s say you’re a new student and you’re Mike’s student and you’re studying and you feel like you’re ready to buy multifamily. I think all you need to exercise is a little bit of patience.
And I’ll explain why. So multi-family prices for value add older properties have been falling and they’ve been falling in a couple different ways. Sometimes it’s [00:26:00] not obvious that they’re falling. And I’ll tell you why, because until about four or five months ago, rent growth was pretty strong in the US. It’s slowed very drastically now because the economies is slowing and that’s not visible yet.
So today, if I look at Marcus & Millichap or any of CBRE, they’re all saying, Hey, rent growth in the US is flat with slightly below zero in some major markets like Phoenix. Austin, Phoenix, these markets have turned negative. But three or four months ago, rent growth was strong and that rent growth drives up net operating income.
And as you know really well, if NOI goes up, the price per door is likely to go up because it tracks. Even though cap rates are driving the price down. Even though interest rates are driving the price down, the net operating income per door was driving it up. So there were two forces. So sometimes you don’t realize that prices have declined about 12 or 13% because on a nominal basis, they may have only declined five or 6%.
Right? Because NOI was going up. But from a cap rate perspective, there’s no doubt in my mind that we are between 12 and [00:27:00] 15% down. So you’ve got a student – he’s studying, he’s ready to go out, he is about to buy a building that’s 15% cheaper than 14, 15 months ago. Isn’t that something that’s good? That’s not bad. It’s good.
The question is, how does he deal with the interest rates? That’s really the question. So the fact that you’re buying a building that’s 15% cheaper is unquestionably good, right? It’s all about the debt. So the big question really comes down to, when will debt drop? When will the cost of debt drop? And there I have a speculation if you want to hear it?
[00:27:34] Mike: Absolutely. And then I have a scenario I wanna run by you.
[00:27:38] Neal: Sure. Alright. So there’s two kinds of debt. There’s fixed debt and there’s floating debt or adjusting debt. No syndicator really ever wants to do fixed debt. There are scenarios where there’s an exception, but most of the time, fixed debt locks you in.
People who had fixed debt in 2007, 2008, 2009, got locked into 9, 10, 11 year projects and were not [00:28:00] liquid for a long time because once you get fixed debt, you have a very large prepayment in case you wanna sell your property. So you’re basically in for seven years. It’s very hard to get out in less than seven.
There are scenarios, but I don’t believe that people who get fixed debt today are going to get out in less than six, seven years. What happened before is not gonna happen again. So then the alternative is floating debt. Well, here’s the part about floating debt that most people even in multi-family don’t fully understand.
Floating debt is composed of two pieces, right? One piece I think most people understand it’s called SOFR. And SOFR is basically the same thing as saying the Fed funds rate. So the SOFR very closely and immediately tracks the Fed funds rate. So if the Fed raises interest rates by 25 basis points, you notice tomorrow morning, SOFR went up 25 basis points.
It’s not exactly the same number because the Fed funds rate is about 4.75. And SOFR is a little bit lower than that, but it tracks exactly. So if the Fed raises interest rates by half a point, guess what? A month from now SOFR will be half a point higher. So most people [00:29:00] understand that that’s the interest rate component piece of your mortgage.
It’s the piece above it that is misunderstood. It’s called the spread. The spread is what banks add on top of SOFR when they give you a floating rate loan. And the spread is locked in on the day that you get your loan and you can’t change it, the spread is unchangeable. The other part, the interest rate, the SOFR part actually, if the fed all of a sudden cuts interest rates because we have bad recession, you’ll get the benefit of it.
Because SOFR will drop and immediately your mortgage payment will drops. So what the Fed does, in the long run, if they bring the rates down, it’ll benefit you even though if you have a floating rate. The problem is the spread. In normal times, the spread is either 1% or one and a half percent, because that’s spread represents risk. And in normal times, it’s low risk. Today the spreads are up to 4%, 4.5%. Some spreads are up to 5%. These don’t represent interest rates. Because [00:30:00] SOFR represents the interest rate, the spread simply represents uncertainty and risk.
Uncertainty and risk. Normal times, one to one and a half. Right now, four and a half to five. Now it’s absolutely proven many, many times over that the moment the uncertainty stops, the spread collapses. It doesn’t require interest rates to go down. It doesn’t require a recession. It simply requires the Fed to stop raising. Because the reason why the spread is so outrageous right now, ridiculously outrageous is because nobody knows when the Fed will stop.
So they’re basically picking their worst case scenario, which is what banks are famous for doing, picking the worst case scenario and applying it, right? The worst case scenario has the Fed going all the way to six and a half, 7%, which is highly unlikely, but that’s what the spread is based on. The moment the Fed says, we’ve raised it to five or 5.25, 5.5, who knows?
And they say, okay, I think we’re good now. We’re just gonna sit on it for six months. We have [00:31:00] this huge weight, it’s still sitting on the economy. Remember, any number higher than two in a quarter is a huge weight on the economy. We’re gonna sit on it. . The moment that happens is spread collapses, and my belief is the Fed will stop either in June or in July.
So there’s a meeting in March. They’ll raise by quarter point. There’s a meeting in May. They’ll raise by quarter point, and I think they’ll also raise by quarter point in June now that we have some very strong economic data. So the Fed stops in June, maybe they stop in July, worst case. The moment that happens within 30 days, you should see the spreads collapse.
The moment the spreads collapse, multifamily becomes Illiquid Market Asset Class. Currently, anyone who thinks that multifamily is a liquid asset class is joking. There is absolutely zero cash flow at this point because any building that you write right now that somebody’s actually willing to sell to you, you need to make some very bullish assumptions to think that you get cash flow.
But the moment, the moment the spread collapses, you get cash flow and you still get the [00:32:00] 15% discount. That’s the opportunity for Mike’s students. As long as they’re willing to be in contract in July with a long ability to stay in contract for months and months and months and wait for the spread to collapse.
[00:32:13] Mike: Interesting. Okay, so I have a deal right now in Tulsa, which is a pretty decent market. Looks like it’s gonna be one of the better markets moving forward.
[00:32:23] Neal: No doubt, no doubt. Tulsa is a very strong market for the future.
[00:32:27] Mike: 277 units. Five property portfolio, class C product, I can assume all five mortgages at 3.5% interest rate, my cap rate going ends about 5.2, I believe.
[00:32:43] Neal: Mm-hmm.
[00:32:43] Mike: Good deal, bad deal?
[00:32:46] Neal: Amazing deal. Buy it immediately.
[00:32:49] Mike: Yeah, I agree.
[00:32:50] Neal: You picked a good market. And Tulsa is not traditionally known to be a great market because it doesn’t gain a lot of population. Oklahoma City tends to gain more population, but it has been [00:33:00] showing up on our charts repeatedly.
In fact, I did a presentation, 2,600 people watched it in late January, and I must have mentioned the word Tulsa, seven or eight times in that presentation.
[00:33:13] Mike: Yep. I think that, I remember being on that presentation and seeing Tulsa come up after we had already been in LOI on this thing going, man, I love this.
So, and I think those markets go back and forth between Oklahoma City and Tulsa anyhow, as one better than the other. But Tulsa’s really poised for the next year. So I’m excited about that opportunity and I think that our limited partners are gonna have great opportunity as well as the GPS on that deal.
[00:33:43] Neal: Yeah. Yeah. I don’t know enough about the deal, but th those are the kinds of deals that it makes sense to buy today. Yeah. And obviously, you’re not getting the best of the rates at this point in time, but you are taking on someone else’s debt and giving yourself the ability to [00:34:00] get a better rate in the future.
So you’re pushing the can down the road, which is really, if there’s one kind of mantra today is find a way to push the can down the road for interest rates.
[00:34:10] Mike: Yeah. Interesting. Well, Neal, thanks for being here. I appreciate you. Before I go to our flash round of the last three questions, why don’t tell people why they should get ahold of you, what you wanna do for them and help them and how they do that?
[00:34:29] Neal: Absolutely. So I think that the first thing is really to get data, to get actionable evidence and information that you can use to make decisions. Right now is a very dangerous time, but it also is filled with opportunity. There’s all kinds of opportunities and we are very good at pointing those opportunities out to people.
It’s easy enough to get to me. I’m the only Neal Bawa on the worldwide web. Just simply type in NEAL and last name BAWA and you’ll find me.
[00:34:55] Mike: And I just wanna say also that I wanna date this as [00:35:00] Q1 2023. Because we know this stuff sits out there for a long time. So this is Q1 of 2023. And as much as this stuff can be confusing in all this data and information, I think it’s fascinating.
And I love your perspective of the ghost above, right? So it really brings it all into perspective. Hey, what’s the best book you ever read?
[00:35:22] Neal: The Miracle Morning. It’s not my favorite, but it enabled me to read amazing books. If you practice The Miracle Morning, you’re gonna read more books.
[00:35:34] Mike: What about the Miracle Morning? Do you practice that helps you in your life?
[00:35:39] Neal: It structures my mornings and it breaks them up into pieces with one of the pieces being that I have to read for 20 minutes. And 20 minutes doesn’t seem like a lot, but you get a lot done. I read at two x and I buy both the Kindle version and the audible version, and I run the audible at two x and then I read. And because I’m both reading [00:36:00] and listening at the same time, I’m able to read the book twice as fast.
[00:36:05] Mike: I’m gonna have to try that. That’s interesting cuz I like reading. And we all know that we only retain so much from visual and we retain so much from hearing, but putting the two together, you retain more.
So that’s interesting. I’m gonna have to try that. I’ll get back to you and let you know how it goes for me. What ‘s the best tourist attraction you’ve ever seen?
[00:36:23] Neal: Hmm. That’s an interesting one. I’ve been all over the world. I’m gonna pick one that’s a little cheesy. I love the mall at Singapore Airport at Changa Airport.
It’s called Jewel, and that’s because it has 150 foot high fountain that you can walk around. And there’s a forest that they’ve built around the fountain and you can see it from six different floors and it looks different from all the floors, and it looks wonderful at night as well. So whenever I transit through Singapore, I make sure I have enough time to go to Jewel.
[00:36:53] Mike: Wow, that’s amazing. I’ve never heard that. I’m gonna have to go check that out.
[00:36:57] Neal: It’s beautiful.
[00:36:59] Mike: Best [00:37:00] restaurant?
[00:37:01] Neal: Oh an Indian restaurant called Turmeric. I’m Indian and I enjoy Indian food, and it’s very rare to get good Indian food that’s cooked the right way. I think most Indian food is cooked terribly in restaurants, turmeric in the San Francisco Bay Area.
[00:37:15] Mike: Cool. Awesome. And that’s where you’re from, right? You’re from the Bay Area?
[00:37:18] Neal: I am from India. San Francisco area, correct? Yes. Yeah. But ethnically from India.
[00:37:22] Mike: Yeah. No, I knew that, but I thought you lived in the Bay Area, so.
Hey, thanks for being here today. Any last nuggets you wanna leave us with?
[00:37:29] Neal: Yeah. The Bible got it wrong by one letter. It is not the meek that shall inherit the Earth. It’s the geek .
[00:37:39] Mike: I love this. Good for you. Good for you. Hey I’m gonna move you to the back room. If you hang out with me for a minute, I’m gonna say goodbye and then we’ll chat real quick. Thanks again for being here.
Hey, everybody. That was intense. Over the top interview with Neal Bawa and some statistics. Go back and [00:38:00] listen to this a few times, but here’s what’s interesting what he did say that deal in Tampa that we’re looking at that has that fixed rate, interest rate low, makes sense. So it doesn’t have to be a Tulsa deal, it could be anywhere else in the country.
Fixed rate debt that might make sense for you. So make sure you look at your numbers perspectively. Look at your operations perspectively. Look at the three ghosts, and even the four ghosts we talked about past, present, future, and the ghost above. But thanks for being here. We’re here every Saturday morning, have great guests.
Subscribe to us on YouTube so you get data every day and like us and love us on social media. We’ll see you next week. Thanks everybody.
[00:38:46] Kristen: Thank you Mike, and thank you for joining us for another great episode of Insider Secrets. As always, Insider Secrets is brought to you by My Core Intentions. Wherever you hang out on social media, you will find [00:39:00] Mike and My Core Intentions. Please like and follow us to get the most up to date real estate investing trends.
Visit mycoreintentions.com where you can get expert coaching on all things real estate investing and property management. If you are looking to become an expert, Mike’s coaching will help you scale your real estate investment business. We’re looking forward to having you back again next week for more Insider Secrets.